Public Bill Committee

[Mr. Roger Gale in the Chair]

Roger Gale: Good morning. This is the ninth sitting of the Committee and we now come to discuss clause 1.

Clause 1

Overview

Question proposed, That the Clause stand part of the Bill.

Ian Pearson: It is a pleasure to serve under your chairmanship, Mr. Gale. As you are aware there are good reasons why we have only now reached clause 1, but it is the meat of the Bill in terms of the special resolution regime. I shall take a limited amount of time to set the scene because clause 1 gives us a good overview of the framework of the regime tools.
The clause sets out the broad purpose of the SRR, which is to address a situation in which all or part of the business of a bank has encountered or is likely to encounter financial difficulties. It outlines the tools at the authorities disposal under the SRR. The special resolution regime includes the three stabilisation options: transfer to a private sector purchaser, to a bridge bank and to temporary public sector ownership. As the Committee will hear when we consider clauses 13 to 24 and 30 to 38, the stabilisation options are exercised through the stabilisation powers, which effect the transfer of shares and other securities or property, rights and liabilities by operation of law. Those stabilisation powers include the onward and supplemental transfer powers set out in clauses 25 to 29 and 39 to 41.
Clauses 42, 43 and 55 provide for a package of safeguards relating to the exercise of partial property transfer powers, which, as Members are aware, proved of particular interest to stakeholders during the public consultation process. I draw attention to the safeguards here because the Government will be issuing a consultation document on them, as I indicated in my letter to Committee members last week, as well as the draft code of practice, which the Committee has seen, on Thursday of this week.
I have established an expert liaison group of banking sector practitioners, including legal and insolvency experts, to advise the Government on the development of the safeguards. The group held its first meeting last Friday, and the consultation document that we publish on Thursday will reflect its views on the Governments proposals. It will also have a key role in continuing to advise the Government through the process of consultation and beyond. Yesterday I tabled a new clause on the position of the liaison group, and we will debate that in due course.

Mark Hoban: It will be helpful to Committee members if the Minister sets out who the members of the expert liaison group are.

Ian Pearson: I will circulate the names of the members of the group to the Committee.
Returning to the overview of the SRR, part 1 of the Bill includes provisions on compensation, incidental functions, the role of the Treasury and how the regime applies to building societies. The special resolution regime also includes the bank insolvency procedure and the bank administration procedure, which the Committee will consider when we come to parts 2 and 3. The special resolution regime outlined in clause 1 is at the heart of the Bill; it establishes a permanent and credible framework for authorities to resolve a failing bank. The SRR provides the authorities with the tools to deal with banks in financial difficulty in a manner that supports the public interest in financial stability, confidence in the banking system and depositor protection.
In most situations, normal regulatory interventions or voluntary action by the management of the bank can resolve an individual banks difficulties. However, bank failures will sometimes occur and can damage confidence, disrupt financial markets, harm depositors and generate significant costs to businesses and to the economy as a whole. Bearing that in mind, it is worth taking a couple of moments to outline the background to the development of the special resolution regime and the genesis of this part of the Bill.
The recent period of sustained disruption in global financial markets, starting in the United States in the summer of 2007, has had a widespread impact on financial markets, firms and economies across the world. In the UK, the most visible consequence of that has been the financial difficulties faced by a number of financial institutions, including Northern Rock plc.
In summer 2007, Northern Rock found itself unable to finance its activities, due, among other things, to a business model that was heavily reliant on funding from the wholesale money market. In the light of those severe difficulties, the Government took action to maintain financial stability, while protecting consumers and the interests of the taxpayer.
In February 2008, when it became clear that, in the light of prevailing market conditions, no institution was prepared to make an offer to take over Northern Rock that was judged adequate to protect the taxpayer, the Government took the decision to take the bank into temporary public ownership. To that end, legislation to give the Government powers to transfer the shares or property of a failing bank was brought forward in the Banking (Special Provisions) Act 2008, which received Royal Assent on 21 February of this year. The main transfer powers expire, under the terms of that Act, on 20 February 2009. That Act provided the Government with temporary powers should further action be needed while permanent legislationthis Billwas being prepared and passed.
The prudence of that approach has been demonstrated by events concerning Bradford & Bingley plc. On Monday 29 September the Government used both the share and property transfer powers provided by the 2008 Act to bring the bank into temporary public ownership and then to transfer the deposit book to a private sector purchaser. The special resolution regime outlined in clause 1 replaces the 2008 Act with a permanent framework for the authorities to resolve a failing bank, with objectives that include protecting and enhancing financial stability and confidence in the banking system, and protecting depositors and public funds. Those objectives will be considered under clause 4. By setting out a clear and credible statutory resolution regime to address a failing bank, which removes control from the banks management by overriding the powers of shareholders and directors, the regime also provides a strong incentive for banks and their directors to take action to prevent their business from getting into difficulties.
Unlike the 2008 Act, the SRR has been designed as permanent legislation and therefore provides a framework with strict conditions that must be met before the powers are exercised, clear objectives that the authorities must have regard to in exercising those powers, and refined stabilisation powers that are targeted in their effect alongside new tools such as the bank insolvency procedure. Clause 1 also establishes that each of the tripartite authoritiesthe Bank of England, the Treasury and the Financial Services Authorityhas a role in the operation of the special resolution regime. The powers and responsibilities of those bodies are extended by the Bill, in line with each institutions current mandate and responsibilities, to enhance the UK framework for financial stability and depositor protection. The SRR also provides the authorities with a wide range of tools to meet the above objectives, by resolving a failing bank or facilitating fast payout to depositors. The establishment of the special resolution regime was widely supported by stakeholders throughout the consultation process; I am also grateful for the support from Opposition Members.
As I have said, clause 1 clearly sets out the framework for the whole package of SRR toolswe will debate the tools latergiving the authorities the full range of options for dealing with a bank that is experiencing difficulties. I appreciate that the Committee will wish to discuss many of the provisions that the clause summarises, and which I have just briefly run through. I am looking forward to debating the provisions in detail over the remaining sittings. However, I propose that detailed consideration of those provisions be reserved until we reach the corresponding clauses. I will be guided on that by you, Mr. Gale. Given that clause 1 is a broad summary clause, intended to provide users of the Bill with a clear understanding of its contents, I urge that the clause stand part of the Bill.

Roger Gale: The clause is fairly wide-rangingas the Minister has indicatedand it is up to the Committee to decide how broad it wishes the clause stand part debate to be, bearing in mind that we need to try to avoid covering too much ground that will be touched on under other clauses. If it becomes necessary to embrace other arguments and discussions prior to further clauses being reached, I shall bear that in mind. As the issue is complex, I am acutely conscious of the need to have a fairly wide-ranging debate now. The decision is in the hands of the Committee.

Mark Hoban: It is a pleasure to serve under your chairmanship, Mr. Gale, for this ninth sitting, which by my reckoning takes us to about halfway through the Committees proceedings. I am not sure that we have broken the back of it yet, but the end is in sight. I take note of your comments, Mr. Gale, about guiding our debate. I recognise the challenge in trying to restrict remarks. One could make a speech that lasted for both sittings today and well into Thursday, but it would not be in my interests or those of the Committee to go down that route

David Gauke: Shame.

Mark Hoban: although my hon. Friend might tempt me to do so if he is not careful. I want to give a sense of where we are coming from over part 1 and to set the backdrop for our debate on it.
As the Minister said, clause 1 sets the scene for part 1. I share his recognition that one of the learning points from the crisis over the last year is the lack of a decent toolkit for dealing with the problems of a failing bank. That came out particularly clearly from the debate on the future of Northern Rock and the time it took to resolve that situation suggests that we did not have the right tools available. I suspect that if the tools that were initially developed in the Banking (Special Provisions) Act 2008 and have been fleshed out in this Bill, had been deployed in respect of Northern Rock they would have produced a different outcome. We do not know what that outcome might have been, but we have seen how Bradford & Bingley was tackled and in some respects it was not dissimilar to Northern Rock in its problems. A very different solution was found for Bradford & Bingley compared with Northern Rock.
It is in a way disappointing that the Government have not listened to the warnings that they were given prior to this crisis about the adequacy of the framework for dealing with a failing bank. At the end of one of the scenario-planning exercises that the tripartite authorities undertook and which looked at this issue in about 2005, both the Governor and the then chairman of the FSA, Sir Callum McCarthy, highlighted the need for a review of the tools that were available. They recognised that the framework that was in place was not sufficient to deal with the consequences of a failing bank.
The Bill provides a set of tools, the stabilisation options in part 1, the insolvency procedure in part 2 and the administration procedure in part 3. When considering those stabilisation options and the transfer to a private sector purchaser and to a bridge bank and temporary public ownership, we need to bear it in mind that this part of the Bill invests significant powers in the tripartite authorities. Those powers enable them to make important decisions affecting the function of the banking system and the wider financial sector, as well as affecting the outcomes for individual institutions and their creditors. The framework for the exercise of these powers is set in clauses 4 and 5, and we will talk about them in more detail later on.
Clause 4 sets out the objectives of the special resolution regime. The Committee will note from the range of amendments tabled on clause 4 that there is a question about the completeness and adequacy of the framework which we would want to probe in that debate. Clause 5 talks about the code of practice. We are grateful for the early sight of the code last Thursday, but as the Minister wrote in his covering letter, it is very much a work in progress. It makes it a little difficult in the context of the debate on clause 5 to understand just what the safeguards will be over the exercise of the power by the Bank, the FSA and the Treasury, given the amount of work that still needs to go into the code. It would be helpful for the Committee if, in his summing up of this stand part debate, the Minister would outline how he envisages the process of consultation on development of the code working, in parallel with the passage of the Bill.
For my part, I would want to see before Report in this place a more detailed code that is much closer to completionI accept it might not be finalisedthan the one that was circulated to us on Thursday, so that we can be sure that a robust framework is in place that will govern the use of these powers. I am sure that when we reach clause 5 we will have a long discussion about the nature of the code.
The concern I havealso expressed in the response to the stakeholders consultationis to ensure that there is a proper framework in place so that these powers are exercised in a predictable way: that people know the circumstances in which they will be exercised. That is what we are lacking at the moment. We will try to tease out how we shall know the circumstances in which the powers will be exercised. That requires further elaboration in the code and I hope that todays debate helps us establish more detail.
In talking through this part of the Bill, it might help the Committee if the Minister were able to use recent examples of how the powers in the special provisions Act have been used, to illustrate how they will be exercised in the framework in this Bill and to explain the points of difference between the special provisions Act and the Bill before us. The Minister referred to how Bradford & Bingley was dealt with in the context of temporary public ownership and the transfer of shares and property. We also had the situation with Heritable where the FSA determined that the threshold conditions had been breached and that led to deposits being transferred to ING Direct and the rest of Heritable being placed into administration; there was a similar pattern with Kaupthing. These are powers that we would expect to see in this Bill.
However, one element of the Icelandic banking system fell outside the powers of the special provisions Act and it would be helpful for the Committee to understand how the Bill would deal with Landsbankis branch in the UK. A different set of powers was used to tackle the problems faced by Landsbanki. We need to understand how the Bill would tackle a situation where a banks branch based in the UK faced significant financial problems. A relatively large number of banks based in the UK operate through a branch system rather than through a UK subsidiary. We will come to that in clause 2, when I will probe it in more detail. That important issue needs to be resolved.
We want to ensure there is some predictability in the way that these powers are used. That will require us to probe some of the language in later clauses. Clause 7(3), for example, says that the power can be exercised if
it is not reasonably likely that...action will be taken...to satisfy the threshold conditions.
That sounds a relatively low test and I think people would expect a higher test where the threshold conditions are to be invoked. We will come to that. That is why it is important in this debate on part 1 to tease out some of the language and the meaning, certainly in relation to that clause. The explanatory notes state:
Those conditions essentially demarcate the boundary that must be crossed before the stabilisation powers...may be applied to a bank.
That does not further our understanding of how clause 7 will work.
The issue of partial transfers is one of the most contentious in the clause, and stakeholders have expressed concern about it. Before debating the relevant clauses, we will want to see as much as we can of the draft statutory instruments that relate to partial transfers, or a clear statement from the Government of the principles that might underpin them. Part of the architecture of the reforms is that the power should be set out in primary legislation, the safeguards in the secondary legislation and further elaboration in the code of practice. We need to see that entire package before we decide whether we are content with the Bill. The Minister has expressed his willingness to make it available, for which I am grateful, but the state that the code of practice was in when it was circulated on Thursday suggests that there is still some way to go before those documents approach a reasonably final stage.
My final point is that the Bill focuses on what will happen when things go wrong. It is important to have the right set of solutions in place when that happens, but I am sure that all members of the Committee feel that prevention is better than cure. We want to ensure that the FSA, the Bank and the Treasury, in tandem with the work that we are doing here to the legislative framework, look carefully at how they will ensure that the preventive framework is in place, so that those powers will hopefully remain sitting on a shelf gathering dust after the current crisis is over, rather than being used on a regular basis.

Peter Viggers: This is a crucial clause in an important Bill. We must realise that we are not going back to the year 2006. When the legislation is passed, we will not be returning to the happy, confident days before the credit crunch impacted a year or more ago. To that extent, the Minister is completely right when he says that the measures we are putting in hand are permanent and that many of the issues relate to a new permanent framework, and that is why it is so important to get it right.
When the US authorities were faced with difficulties and introduced Sarbanes-Oxley, the effect on the banking industry and the efficiency of financial markets was disastrous. The City of London will be allowed to expand to a greater extent than it might otherwise have done because the American financial markets are now rather constipated and hampered by the bureaucratic and legalistic effects of Sarbanes-Oxley and the imposition of measures that caused difficulty for their operation.
Some of the measures that we are introducing now will be permanent, but others will of course be temporary, and that imposition will need to be removed if we are to return to the days of an efficient and confident banking system. We need to distinguish carefully between the permanent measures, which we must get right, and the temporary measures needed to satisfy the present difficulties.
I have previouslyI remember raising the issue with the Minsterput forward the nearest analogue to the present situation, which is the situation of Lloyds of London in the 1990s. I draw on my experience as a director of a bank in the secondary banking crisis of the 1970s, so I have, uniquely in the Committee, been here before. I was also one of the four members of Lloyds of Londons audit committee when it pushed through what was then the biggest single corporate rescue in the history of finance, so I am sure that the nearest analogue to our present situation is Lloyds of London. In that case, an insurance underwriter would underwrite a risk and then lay it off by reinsuring with another insurance entity. That second insurance entity would then lay off his risk. What would develop was what was known in Lloyds days as a spiral, which was a spiral of reinsurance so that the second, third, fourth, fifthperhaps the 15thinsurer did not know the exact nature of the assets he was reinsuring. That is a very close parallel to the current collateralised debt obligations. Our present difficulties arose because of the creation of collateralised debt obligations in the United States initially, and the reinsurance and refinancing of the toxic assets in a spiral very similar to the Lloyds spiral of the 1990s.

Brooks Newmark: I have to agree with everything that my hon. Friend is saying about some of the causes. Does he agree that another major cause was that many of the directors of these banks did not understand where some of the hot shots on the derivative desks were making the money? The derivatives they were trading were very complex and highly leveraged. The question here is how we legislate to ensure that directors understand where their institutions are making their money and what the risks associated with those assets are.

Peter Viggers: Indeed. My hon. Friend makes a very good point. I recall being called in by the then Prime Minister Margaret Thatcher, who told the assembled junior Ministers that we would be faced with a number of complex situations. Quite often it was difficult to understand the nature of the complexity of the issues that were being put to us. I remember her saying with a very firm and direct gaze, Never do something you do not fully understand. That is exactly what happened in the secondary banking crisis. There were people in senior positions in banks who did not fully understand the nature of the complicated instruments that they were acquiring. They saw those very clever hot-shot people dealing in these assets. They saw that fees were involved. They saw that it was very profitable and they allowed the deals to go through.
There is an exact parallel here with Lloyds of London. I remember it very well. One Lloyds underwriter would nod through risks that he did not fully understand. In the trade he was known as the nodding donkey. Anyone wanting to offload a risk could go to him and he would agree because he was making a great deal of money out of trading in assets that he did not fully understand. There is a close parallel. I could go into considerable detail on this. It took up a great deal of my time in the 1990s, but the parallels between the Lloyds spiral then and the banking spiral in the last year or two is very close.

Brooks Newmark: There is one other point to make. People at Lloyds felt that they could effectively pass the sardines continually around and that everybody would keep making money. It is analogous to what has gone on in the last 10 years and the theory that it was the end of economic history; we had ended this era of boom and bust and we could manage growth for ever. Perhaps this is the hubris that we have foundI do not mean to be too political herewith the current Governments thinking that they could control events and control cycles. But at the end of the day it is difficult to control cycles. Therefore the Bill needs to address a little bit more how we manage our way through difficult times, particularly economic cycles. We have seen today that we have not ended the era of boom and bust.

Peter Viggers: I very much respect all the points that my hon. Friend makes. He is one of the Members of Parliament who, in a previous incarnation, dealt with very large amounts of money. He understands large sums with lots of noughts on the end, which are difficult to grasp if one has not been involved in banking and international financing matters.
There are close parallels between the Lloyds situation of the 1990s and the banking situation that has developed in the last year or so. What lessons can we learn? I have made the points before and it is a matter of regret to me that despite the fact that I have talked to journalists from the Financial Times, made speeches on the Floor of the House and raised the issue with the Minister, the points that I am about to make have not been fully understood and comprehended.
What did Lloyds do? How did it face up to that very difficult situation? Faced with a spiral of risks, which were not fully understood, that had been undertaken by a range of bodies, Lloyds separated the toxic assetsthe uncertain assetsfrom the viable, continuing business. That is what the banks should be attempting. They should be carrying out a much more scrupulous, careful and determined analysis of their assets and should be separating out the viable, continuing business. All the banks and building societies that we have been talking about have very sound businesses and assets. The accountants and others need to identify the parts that are definitely, provably sound and then separate them from the assets that are not definitely, provably sound. Of course, not all of those assets will be defective and useless; many will be valuable. When I talk about toxic assets or doubtful assets, I am not talking about worthless assets, but those with a value that cannot be completely proven.
Lloyds separated the uncertain assets and moved them into a new vehicle, which was called Equitas. If we were to follow that plan in the current banking situation, Smith bank Ltd would identify the proven valid assets, which would stay in the parent company, but all the uncertain assets would be relegated to a subsidiaryfor the sake of simplicity, let us call it Smith Toxic bank Ltd. Smith bank Ltd owns Smith Toxic bank Ltd, which owns the uncertain assets. There are two key points: first, it is crucial that new moneytaxpayers money, investors money and shareholders money subscribed by way of rights issue or preference sharesdoes not go into the old, mixed up Smith bank Ltd, which includes toxic assets, but into the new Smith bank Ltd, the parent company, which only has assets that are known to be sound.
One does not invest new money in a body that has assets of uncertain value, which is why I think that the Hank Paulson plan is fundamentally flawed, although I am not claiming to know more about banking than Mr. Paulson. It is flawed because it involved putting the $700 billion of new money into mixed bodies that included the toxic or uncertain value assets, rather than putting it into proven, sound top companies.

Peter Bone: My hon. Friend is making a clear argument. The standard way that accountants would deal with the matter would be to provide fully against what we have called the doubtful, or toxic, assets. Those should have been written down and established before any investment decisions were made. Would that not have the same effect as my hon. Friends suggestion?

Peter Viggers: I think that one needs to go further to identify and isolate the toxic assets. Drawing on the parallel of Lloyds of London, taking a top company and making allowances and provisions against its assets does not have the same decisive and incisive effect as separating off the assets. Identifying and isolating toxic assets is a central feature of the way ahead.

John Pugh: The hon. Gentleman puts forward a therapy for many banking ills. Does he consider that the procedure that he is mapping out would probably have been a better way of dealing with Northern Rock in the early days, when some of the sub-prime mortgages were held by Lehman Brothers and an agency of Northern Rock?

Peter Viggers: Indeed. My point has general application. My central point is that new money should go into the purged body, so that shareholders and taxpayers know that they are investing in a sound body rather than a tainted or uncertain one.
There is some good news here. My second point is that if the tainted assets are identified and isolatedcarefully identified and cross-checked against other tainted assetsit will be found that because the spiral has involved reinsurance or, in the case of CDOs in banking, reinvestment, in a ring, all the banks that undertook that insurance or investment made reservations against their investment, because they too were uncertain about the value of the asset. When all the tainted assets are pulled together and carefully cross-checked, the bank that undertook the collateralised debt obligation and then sold it on will be found to have made reservations against the CDO, as did the second, third and fourth banks and so on, perhaps in a multiple ring. There will have been a duplication of reserves in the spiral, and therefore the risk and the potential loss will not be quite as great as had been thought. That is the good news.
I urge that there be much closer analysis and breakdown of risk, that investment go into the purged top body and not into the mixed body, and that an analysis of the toxic assets be undertaken, perhaps by a different body. If Smith bank toxic assets and Jones bank toxic assets are pulled together and carefully identified, the lesson of Equitas is that there will be duplication and the risk will not be as great as originally thought. That is exactly what the sage of Omaha has discovered; his American company has invested in Equitas, demonstrating that the value of the loss was not as great as it should have been.
I have seen some references to the point that I am making. For instance, last week a former Japanese Finance Minister made an important speech, urging that there be closer analysis of the risks that banks have undertaken and more careful identification of the toxicity of the assets. I return to my central point, which is that I am not satisfied that the authoritiesthe Bank of England, the Treasury or the Financial Services Authorityhave done enough to ensure that banks undertake as scrupulous and detailed an analysis of their prospective losses as they should.

Brooks Newmark: I agree that the Paulson plan was flawed, in that it effectively asked taxpayers to stump up for all the bad assets. My hon. Friends solution is to try to separate off the bad assetseffectively creating a good bank and a bad bankbut he will find that many assets defined as toxic are not really. They are assets that are effectively under water compared with when particular individuals took out loans. These houses still have a value and over time these particular assets will, with inflation, rise and no longer be toxic assets.
A weakness of some of the solutions that have come up is that there is no solution to deal with the front-end crisis, which is a super-decline in asset values, almost to an extent that the values of houses are lower than any rational market would say that they are. One needs to come up with a solution that gives confidence to people who are borrowing and to the housing market, so that over time many of these so-called toxic assets effectively reflate their way out of their toxicity.

Peter Viggers: Indeed. Using the word toxic is shorthand, which is why I did expand and say uncertainty, because uncertainty derives from not knowing how other people will value the assets. A book of mortgages will have a high value if people are confident in property prices but if they are not confident the value is doubtful and becomes toxic. We need to restore confidence. If one is drowning and wants to restore confidence, one has to get a foot on the bottom of the swimming pool. It is no use just splashing around. We have to find a firm, clear point of certainty, which in my opinion is to have assets that are certified as valid and sound. That is where new money should go, not into the mixed body.
I am grateful to the Minister for his attention. I am concerned about this point. I hope that more can be done to satisfy me that the point has been grasped and that the Government are working in this way.

Peter Bone: I am pleased to follow my hon. Friend the Member for Gosport, who made an important case and highlighted the problems in clauses that we shall be discussing.
My hon. Friend described the problem of what we have seen in the banking sector as a spiral. The accountants reaction to this is that all these debts are toxic. It is an unfortunate word because it really means doubtful value of assets. They might not be toxic. What has happened is a collapse in the market for those assets. As a chartered accountant, my reaction is to ask why we do not write those things down to their lowest possible value. That is the problem. If they are written down to where they are at the moment, there is a collapse in the asset base of the individual banks, which then has to be responded to by stuffing in capital through investments in shares and preference shares, which is the way that this crisis has been handled. I am interested in the idea of moving these debts out of the banks and putting them into separate subsidiaries. That is an interesting proposal because it then produces a good bank and a bad bank but the bad bank might not actually be a bad bank. That is one solution.

Mark Todd: If the hon. Gentleman has studied the Scandinavian banking crisis, he will know that the establishment of the bad bank there did eventually deliver a rather better outcome than had been anticipated because, as he says, they were not assets without value; they were simply assets for which it was not possible to determine an appropriate market value at that time, which had led to substantial writedowns. So there is merit in a bad bank option.

Peter Bone: I am grateful for the hon. Gentlemans intervention. I do think that we should be looking at that.
The other solution is to take a more realistic value of the provision made against the assets. Instead of writing them down significantly, they should be written down to a realistic value, as we heard Angela Knight argue in oral evidence. If that is done, the requirement for the capital to be injected into the bank is by no means so great.
I am also concerned that the Bill does not address the speed at which the Government have put in, or propose to put in, extraordinary amounts of money without really knowing the value of the banks. It is extraordinary that banks that could make billions year after year can overnight seem to become virtually worthless so that, without billions of pounds of investment by the Government, they would sink. We have already seen in todays media that the proposed injection into Lloyds bank of huge amounts of preference money by the Government is now being said by Lloyds to be unnecessary because it will have repaid it all within a year. I question whether we are looking at the real problems or reacting to the crisis as we perceive it at the moment.

John Pugh: I do not know whether the hon. Gentleman shares my conceptual confusion. I listened carefully to what the hon. Member for Gosport said about differentiating toxic and non-toxic assets and what the hon. Member for Wellingborough said about how the toxicity of assets could change. The hon. Member for Gosport then redefined toxic and non-toxic in terms of certainty and uncertainty, but what is toxic or non-toxic then itself appears to be uncertain. I wonder whether we ought to continue to use the term toxic, given that it is largely a metaphor and has no real resonance in economic science.

Peter Bone: The hon. Gentleman makes my point. The word toxic is trundled out in every news broadcast as though it means something, but it does not mean anything. It is the actual value of an asset that we cannot be sure of, and I think that we have got the approach wrong on that. My hon. Friend the Member for Gosport suggested a solution that really highlights the issue. The bad bank is nowhere near as bad as it looks, because those assets have been provided against time and again by different banks, so it is only really the first set of debts, where the first loans are in doubt and part of them will be valuable anyway, that needs to be provided against. I am not sure that the spiral of debt, which has led to a spiral of provision against the value, is necessarily the right way forward.

Brooks Newmark: My hon. Friend has made several excellent points, and it might be instructive, not only for him, but for my hon. Friend the Member for Gosport, and perhaps even for the Minister, to have a look at a new document that has come out today from the Centre for Policy Studies called From Boom to Bust: a plain guide to the causes and implications of the banking crisis by Mr. Howard Flight. Reading his analysis might be a helpful guide to the Minister in coming up with some robust solutions to the current crisis.

Peter Bone: I thank my hon. Friend for his intervention. I have not had a chance to read that document, but I am sure it would be worth reading, because Mr. Flight is a superb author.
In conclusion, I feel that we should avoid using the word toxic because it is misleading. We just need to look at the basics of what a company is and what its value is. The banks cannot have gone from being the soundest investment one could possibly have, making billions of pounds each year, to having such colossal writedowns overnight. That just does not make common sense.

Ian Pearson: Perhaps I could begin by responding to the comments by the hon. Member for Gosport and then move on to the issues regarding Landsbanki, safeguards, the code and consultation.
I accept the broad thrust of the analysis by the hon. Member for Gosport: that the origins of the global financial crisis were in the sub-prime market in the United States and that there was insufficient understanding of the impact of collateralised debt obligations on the whole market system. I do not particularly like to use the term toxic assets either. However, in this case we are talking about impaired assets in some shape or form.
The hon. Member for Gosport sees close parallels with Lloyds. There are some parallels, but there are also different circumstances. In the case of Lloyds and the reinsurance market some years ago, the company got into significant difficulties but it dealt with them. Banks or building societies may get into difficulties and they will manage them themselves. They will adopt a number of strategies, whether that is writing down the assets or isolating and separating out bad and doubtful debts. I do not think that there was a systemic risk to the global financial system in the case of Lloyds, as there has been as a result of the problems in the sub-prime market. But that is not to say that the hon. Gentleman does not make a number of valid points about these areas.
The hon. Member for Wellingborough mentioned the accounting treatment in this area. He will be aware of changes that were announced a couple of weeks ago in how the mark-to-market rules are to be interpreted in distressed economic conditions. That has been a beneficial clarification. The Government were still right to take the action that they did on liquidity, recapitalisation and providing debt guarantees to stimulate inter-bank lending. It is important to recognise that action needed to be taken on all three fronts because of the financial situation that we found ourselves in.

Peter Viggers: I would submit that the situation at Lloyds and the present situation are very comparable. When the Minister said that the Lloyds case would not have led to the collapse of the financial markets, he described Lloyds as a company. Lloyds is not a company. It is an unincorporated structure. The people backing Lloyds at that time were 30,000 of some of the richest people in the United Kingdom, whose names were put forward to become names at Lloyds. If Lloyds had failed it might well have led to the bankruptcy of some 30,000 leading citizens and would have had a devastating effect on the City of London and on financial markets generally. The parallel is closer than his remarks indicate.

Ian Pearson: I agree of course with the hon. Gentlemans statement about the legal status of Lloyds. I was trying to draw a distinction between that and the problems that banks and building societies might face in the future.

Peter Bone: I should be grateful for the Ministers opinion. He talks about liquidity, which obviously needed to be put into the banking system, and bank guarantees, which I also understand, but I query the third elementthe capital. If one has written these doubtful assets down to a level that is far less then they are worth, one is putting in billions of extra capital that would not be necessary if one had the right valuation in the first place.

Ian Pearson: The hon. Gentleman is clearly right that in distressed market conditions assets get written down. In the case of banks that would affect their tier 1 capital ratioshence the need for recapitalisation. Obviously we have gone through completely exceptional circumstances over the last couple of months, which is why there have been substantial international discussions, and why we took the action that we did across three frontsliquidity, recapitalisation and debt guaranteesto get the inter-bank lending market moving. It is why there has been general consensus, as a result of those international discussions, that this is the right approach, and other countries have followed our lead. However, that does not neglect the need for banks and building societies to take action to deal with their own situations. The hon. Member for Gosport is completely right: hiving down the impaired assets part of an institution to a subsidiary company can be an effective strategy, and some institutions have done that in the past 12 months.

Brooks Newmark: Did the Government consider converting debts such as bondholders into equity, as a way of right-sizing the impaired capital structures of those banks? That would give the balance sheet a sensible capital structure, as opposed to simply infusing taxpayers money to right-size the balance sheet, which would leave impaired debt in place. I mean junior debt not senior debtbondholders, for example. There are many bondholders in all those banks, and they could easily have been forced to convert their debt into equity.

Ian Pearson: We had detailed discussions with the banks on a wide range of issues concerning their financial position. We believe that we took the right course of action, in conjunction with the banks, to help to ensure stability in the financial markets.

Mark Todd: One of the difficulties with using the bad-bank option as a relatively rapid response to a crisis is that it requires the unpicking of the asset basis of the various businesses that have been handled differentially, because of the different approaches to writedown that banks have taken in short time frames. The Scandinavian model was facilitated by almost the entire Scandinavian banking system ending up in public sector hands, which meant that the separation of assets into a bad bank could be compelled through one coherent ownership model. That is not the case in the UK.

Ian Pearson: That is a helpful clarification for the Committee, but I repeat that there is nothing to stop individual banks putting assets into subsidiaries at the moment. It is a perfectly permissible approach. We will discuss good banks, bad banks and partial transfers later, but the point emphasises the importance of the safeguard provisions. I shall speak broadly about them in a moment, and we will come back to them under clauses 42 and 43.

Mark Hoban: May I take the Minister back to his comments on capitalisation and the writedown of asset values? Is it his view that the Governments contribution to the recapitalisation of bankseither subscribed for by private shareholders or underwritten by the Governmentis sufficient to cover historical writedowns only, or has some idea of future levels of writedown on both mortgage-backed securities and corporate debt been factored in?

Ian Pearson: I do not want to respond directly, but I will say that the agreement that the Government have reached with the banks has been designed to ensure that the banks are able to meet their tier 1 capital ratios. The overriding objective of the Governments actions has been to ensure confidence and stability in the banking system.

Mark Todd: The Treasury Committee queried an aspect of this yesterday. It was made reasonably clear that the FSA and the banks had modelled requirements according to a variety of circumstances, which would have included a substantial further loss in their asset base before determining the capital injection requirement that the Government have subsequently offered.

Ian Pearson: I thank my hon. Friend for that comment. I understand that the Chancellor wrote to the Chairman of the Treasury Committee providing a significant amount of detail regarding the announcements that were made in the House on 8 and 13 October and that that is publicly available.
I move on to the point about Landsbanki raised by the hon. Member for Fareham. We can deal with it in more detail in clause 2, if it is felt necessary. We believe it right to put in place arrangements to ensure that retail depositors receive their money in full and we continue to work with the Icelandic authorities to ensure fair treatment for UK depositors and creditors. There clearly is a difference, which we discussed earlier, between subsidiaries of an Icelandic bank, which are regulated by the FSA, and branches, which are regulated by the home country authority. The Bill does not in general allow the authorities to take control of branches of European economic area banks in line with our obligations under Community law. There are clear EU law obligations that we need to apply.
The Bill differs from the Banking (Special Provisions) Act 2008 specifically with regard to new tools to deal with failing banks, such as the proposals on bridge banks, and the two new insolvency proceduresthe bank insolvency procedure for fast payouts to depositors and the bank administration procedure to make partial transfers effective. There are other differences with regard to preconditions, framework powers and compensation. It might be helpful if I circulated to the Committee a brief summary of the differences between the Bill and the 2008 Act. We are able in the Bill to provide a permanent framework to refine and develop the powers in the Banking (Special Provisions) Act. In some cases those powers are very broad, and there was significant stakeholder concern about their broad nature and the fact that there is not the legal certainty that hon. Members rightly want. That is why the safeguard provisions, and others that we will come on to discuss, refine the powers in the Act.

David Gauke: I am grateful to the Minister for his offer to circulate a document distinguishing what we have in the Bill and what is in the 2008 Act. Some elements of the Financial Services and Markets Act 2000 are to do with transfers of property too. As the Minister is being so helpful, would it also be possible to circulate a summary of any developments and changes regarding the Financial Services and Markets Act as well?

Ian Pearson: I will certainly look to do that as speedily as possible.

Mark Hoban: Before the Minister moves on, I should like to return to the comparison between the 2008 Act and the Banking Bill. Clearly the 2008 Acts powers have been used to bring about change in a number of institutionswe have talked about Bradford & Bingleybut how would those circumstances have been handled if the wide-ranging powers in the Banking Bill had been available to the Government? Knowing that will help us to understand how the Government will apply the powers in practice in a context with which we are familiar.

Ian Pearson: It may help if I clarify those points directly. A Bradford & Bingley-type resolution is possible under the Bill, because clause 2 permits the transfer of banking to temporary public ownership via a share transfer. Clause 14 permits the partial transfer of the deposit book and branches, such as in the case of Santander. A similar result is also possible using direct partial transfer by the Bank of England to Abbey or any other private purchaser, or, alternatively, via a bridge bank. The exact resolution option used would depend on a wide range of detailed factors, but the options pursued in the Bradford & Bingley case are possible under the permanent regime if a similar situation arises in the future.

Mark Hoban: That is very helpful, but can the Minister go further and elaboratenot necessarily now, but perhaps when we discuss the relevant clauseson the factors that suggest one course of action rather than another? It will help to build a sense of how the powers will be used in practice if the Minister uses the same examples later on and says, If this happens, we will use these powers for these reasons and if something different happens, we will use a different set of powers.

Ian Pearson: I shall see what is possible. The range of tools is an important feature of the regime and how the tools are used depends on the particular circumstances faced. With Kaupthing Edge, deposits were first transferred to a company owned by the Bank of England and then to ING Direct; under the Bill the same effect can be achieved in a variety of ways, as I have outlined with regard to Bradford & Bingley. I am happy to write to the Committee setting out the general differences between the Bill and the 2008 Act. If I can, I will give examples of how the same situations are still possible.
Finally, I want to respond to the comments made by the hon. Member for Fareham about the consultation process on the code. As I outlined in my initial remarks, on Thursday we intend to publish a consultation document on the safeguards and on the draft code received by the Committee last Thursday. I want to highlight the fact that the safeguards will be put in secondary legislation, which is what stakeholders have been asking of us. That obviously ensures that there will be proper parliamentary scrutiny in future.
As I indicated, I have already shared the draft code with the expert liaison group and I will ensure its continued involvement. However, given that we are publishing the draft code only on Thursday and there needs to be a consultation period, I cannot guarantee that we can have a further draft of the code by Report, because we will not have been able to get all the consultation responses. The assurance that I can give is that the real detail of the safeguards will be in secondary legislation. That will go through the parliamentary process, which will certainly ensure a level of scrutiny. Our intention is that consultation on the code will be finished and we will have the final version before the Bill completes its parliamentary passage. If there are any concerns about it there will be an opportunity for them to be expressed at a later date.

Mark Hoban: I am grateful to the Minister for that clarification of the process, but two questions arise. First, will the code to be published on Thursday be significantly different from the code that members of the Committee saw last Thursday? Secondly, the Minister will be aware of the concern about the possible gap between primary legislation being passed and secondary legislation being debated. What is his view about that gap? Will secondary legislation be in place around the time of Royal Assent, or will there be a longer delay? The longer the delay, the greater the uncertainty in the market about how effective those safeguards will be.

Ian Pearson: First, my understanding is that the code is not substantially different from the draft that the Committee saw last Thursday. It has been seen by the expert liaison group at first-cut level. Undoubtedly there is potential for it to be modified through the consultation process by the expert liaison group and by others who will naturally have an interest in it. I completely appreciate what the hon. Gentleman says about the gap. I would like as small a gap as possible between the legislation coming into force and the secondary legislation being improved and that is certainly what we will endeavour to achieve. The consultation document that we are issuing this Thursday provides some draft legislation showing what the secondary legislation would look like. There will be an opportunity for its external scrutiny, and I hope that it will be in good shape so that we can implement it as soon as possible after the Bill receives Royal Assent.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2

Interpretation: bank

Ian Pearson: I beg to move amendment No. 87, in clause 2, page 2, line 28, at end insert
( ) Where a stabilisation power is exercised in respect of a bank, it does not cease to be a bank for the purposes of this Part if it later loses the permission referred to in subsection (1)..
This is a technical amendment, which makes it clear that the provisions of part 1 continue to apply to banks in respect of which stabilisation powers have been exercised, even should such banks lose their regulatory permission to accept deposits under the Financial Services and Markets Act 2000.
An example of where that scenario could be material is as follows: as we will discuss when we come to clause 57, the expression residual bank is used in subsection (1) of that clause to impose continuity obligations between a residual bank and a transferee. It is highly likely that a residual bank will have been placed in the new bank administration procedure, and in such circumstances the residual bank would no longer have a valid deposit-taking permission. The amendment would prevent the argument from being made that a company without a deposit-taking permission is not a bank, and hence not a residual bank within the meaning of clause 57(1).

John Pugh: I should like move to a wider point. There used to be a well honoured distinction between retail banking and investment banking, but that has now completely gone in legislation. May I probe the Minister a little? Has any thought been given by the Treasury to reinstituting such a distinction in terms of which regulations may apply to which type of institution? Over time such distinctions become almost meaningless, but that is part of the problem.

Roger Gale: Order. Before we go wider, the Minister made it plain, and it is clear, that this is a technical amendment. Ordinarily, I would be relaxed about having a broader debate, but it might help the Committee if we deal with the amendment and then have a stand part debate during which hon. Members may go wider. I think that is the appropriate way to proceed.

Ian Pearson: I am happy to abide by your instruction on the matter, Mr. Gale. I have explained clearly that this is a narrow technical amendment that we believe to be necessary, and I hope that the Committee will support it.

Amendment agreed to.

Question proposed, That the clause, as amended, stand part of the Bill.

John Pugh: I do not need to reiterate the remarks that I made before, but there is a strong feeling that we might need different regimes for different types of bank. If there is no capacity to differentiate types of bank in legislation, it is obviously another tool that is not in the toolbox. The legislation is clearly being introduced in response to an immediate crisis, but there must be far-thinking spirits in the Treasury who are considering what they can do to give long-term stability to the banking sector as a whole.
In America and the UK, there is some thought that some of the liberalisation that blurred distinctions between different types of bank was a mistake and part of the problem. Is the feeling in the Treasury that a bank, however it is defined, should simply have that sort of global meaning, or is there capacity to distinguish between types of bank in regulation and legislation?

Mark Hoban: I do not normally get excited about the definition bit of a Bill, but I just want to push the Minsters thinking on that point, partly to echo the comments of the hon. Member for Southport, because he highlighted an important distinction. Subsection 1 of the clause states that
bank means a UK institution which has permission...to carry on the regulated activity of accepting deposits.
However, some banks that do not accept depositsinvestment banks, in effectwould fall outside the scope of part 1. Elsewhere in the Bill, we have already given the Government the power to provide financial assistance to what would be called, in the context of the amendment, non-banks and financial institutions that are not deposit-taking institutions. That was set out in clauses 214 and 215, which we debated last Thursday morning, so the Bill already envisages that the Treasury could bail out an investment bank, insurance company or investment manager. Investment banks make a major contribution not only to the economy, but to financial stability, so I am not clear why they are being excluded. It suggests that the entire bias of part 1 is to protect depositors, rather than looking at the broader perspective of maintaining financial stability, which is set out in the objectives under clause 4. I am a little concerned that the wholesale operations of banks will not necessarily be covered in part 1.
If one takes into account what happened with the collapse of Lehman Brothers in the US, one can certainly see that there has been a significant impact on the UK as people sought to unwind their trades, and hedge funds tried to work out their position. Hedge funds were examining whether their agreements were permitted, whether the transactions between Lehmans and its accounting partners would hold, whether client money counts, and a whole host of related issues. I would not want to say that it undermined financial stability, but it certainly slowed down the current working of the wholesale markets. I would have thought that some of the powers in part 1 might be of use if a wholesale bank were to face financial problems, and I am concerned that subsection 1 seems to exclude institutions that are commonly known as banks but that do not accept deposits from customers.
My second point is about subsection (3). I touched on it in the previous debate and the Minister flagged it up for more detailed discussion under clause 2. Subsection (3) defines a UK institution as one that
is incorporated in, or formed under the law of any part of, the United Kingdom.
The example that I used to probe the Minister on how far the regime goes the UK branch of the Icelandic bank Landsbanki. Interestingly, Landsbanki also had a subsidiary in the UK, which was dealt with differently from the branch. Peoplemyself includedwould say that although it was important for the Government to protect the interests of Landsbankis depositors in the UK, it was evident that the Government lacked the tools to look at the banks assets, which is why they had to use the Anti-terrorism, Crime and Security Act 2001 passed in the aftermath of 9/11.
How will the powers in the Bill affect a branch in the UK? Branches undertake significant banking activities, and the Financial Services Compensation Scheme website will list all deposit-takers that are branches of overseas banks. That will indicate how important the matter is. In a slightly different area of financial services, rules have been developed for businesses operating in the UK with headquarters overseas, to enable the branch arrangement to become more familiar. However, how Landsbanki was dealt with raises the broader question of how we manage the affairs of branches where there is financial collapse, which links to my point on investment banks. One investment bank that springs to minda major player in Londonis a branch of its parent and is, therefore, not incorporated in the UK.

David Gauke: My hon. Friend makes an important point. In essence, the issue is that under the investment services directive, prudential regulation for passported institutions is performed by the home state regulator, not the host nation. At the moment, therefore, the FSA and the Bank of England do not have a role in regulating prudential supervision for such branches. It would be interesting to know what, if anything, is changed by the Bill.

Mark Hoban: My hon. Friend makes an important point. There is a distinction between the conduct of business rules, which would cover a branch operating in the UK, and prudential supervision. We could end up with the curious situation of a financial services sector in the UK that had become so internationalised that although the FSA regulated the conduct of business, it could not say a great deal about prudential regulation because there was a series of branches. If branches are excluded from the Bill, the Government will have few tools with which to protect the UK financial system when its stability is threatened.
It is important that the Minister elaborates in his reply how the Bill affects those branches, and what other tools are available to safeguard the interests of depositors in branches. As the Landsbanki example demonstrates, there seems to be a lack of alternatives, other than the freezing order under the 2001 Act. I do not want to debate thatwe did so last Monday in a Committee on Delegated Legislationbut it is a good example of the limitations of the Bill and why the Government need to make clear which tools in the Bill can and cannot be used in respect of a branch.

Ian Pearson: Clause 2 sets out the definition of a bank for the purposes of the Bill. A bank is defined as a UK institution that has a regulatory permission granted by the FSA under the Financial Services and Markets Act 2000 to accept deposits. If such an institution gets into serious difficulties, the authorities will have the option of using the stabilisation powers of the special resolution regime set out in part 1 where that is justified in the public interest.
The definition of a bank does not include a building society or a credit union. They have their own particular legal characteristics and the provisions of the special resolution regime need to be modified accordingly. Clauses 71 to 75 set out how the special resolution regime is applied to building societies and clause 76 allows it to be extended to credit unions. The Treasury will also by order add to the exclusions from that definition of a bank, which may be necessary to refine further the precise scope of institutions that may be subject to the SRR and to take account of future developments.
Two key points were raised by hon. Members. First, I shall respond to the hon. Member for Southports point that the legislation does not differentiate types of bank. That is not true. The Bill clearly applies only to deposit-taking institutions. It does not apply to investment banks without deposit-taking permissions, which are completely different. I hope that makes the situation clearer.

John Pugh: I accept that and I am grateful for the clarification, but I think the Minister would accept that under subsection (1) it is a necessary condition that a bank takes deposits. A big bank may do lots of other things as well, so under the definition of a bank one might find banks that are straightforward, traditional banks such as the Co-operative Bank, and others where deposit-taking is a very small, almost incidental, aspect of their business. Their real money may be made elsewhere and they function in most respects as investment banks.

Ian Pearson: I understand the point that the hon. Gentleman is making but we consulted widely on the point about investment banks, and it was clear that the Bill and the SRR could not apply to non-deposit takers. The Treasury is considering which steps to take in the case of other types of institution and we will consult more widely. There is clearly a significant issue.

Mark Hoban: Can the Minister explain why it is not appropriate to apply these powers to investment banks?

Ian Pearson: This is an area where we believe that further work is needed. All the consultation that has taken place to date has been on the basis of the Bill as it stands and to extend it would be a significant change. Extending the SRR to investment banks may help to protect financial stability if a failure were to occur but we believe such action would have a significant number of downsides. The risks of such an approach might include the fact that the tools might not be the most appropriate for non-deposit-taking financial institutions. The SRR, including the infrastructure, objectives, powers and some of the tools, has been designed with an emphasis on depositor protection as well as being part of financial stability. The cross-border nature of the largest and most systemically important non-deposit-taking institutions suggests that the national approach on its own might not be enough. That applies to some extent to any deposit-taking multinational but the issue is far more acute for investment banks.

Mark Hoban: This almost falls into that great Yes Minister thing of being too difficult. We are a global financial centre and, yes, there is a range of multinational institutions based in the UK, some of which are deposit-takers, some of which are investment banks. One criticism of the previous arrangements was that there appeared to be no measures in place to deal with the collapse of Northern Rock. That had a detrimental impact on Londons relative standing among global financial centres. We are a global international centre, yet the Government have shied away from thinking through the consequences of the impact of the collapse of a multinational investment bank in the UK. The Government have missed an important opportunity to think that through and to recognise Londons pivotal role in international financial services.
Mr. Newmarkrose

Roger Gale: Order.

Ian Pearson: I give way to the hon. Member for Braintree.

Brooks Newmark: I thank the Minister for giving way. My hon. Friend the Member for Fareham makes an important point. I am curious to know what representations the Minister has had from the investment banks, which are all based in the UK, and what feedback he has had about what the Government propose.

Ian Pearson: There is widespread support for the measures in the Bill, particularly the definition in the clause. The Bill focuses on deposit-taking institutions. It is quite right for the Committee to point out that investment banks are in a different category. Most are not deposit-taking institutions and to that extent would not be covered by the Bill. As I have indicated there are potential downsides if we try to include investment banks in the Bill. It is an issue on which the Treasury is doing further work, together with the tripartite authorities. We want to ensure that we take all the action that is necessary to give people confidence that the overall financial system is in safe hands.

Colin Breed: We understand that. The aim is to protect depositors. However, there are wider issues, the widest or perhaps most appropriate of which is the fact that most of the problems for depositors have been caused not by the deposit-taking and normal banking business of those institutions, but by the very activities of aspects of the bank that are not included in these regulations. Therefore, there is a real case for considering how the regulations can be moved into the investment banking side and perhaps even for the real disaggregation of those activities so that they can be separately regulated.

Ian Pearson: The hon. Gentleman makes a fair point and it is something that we will want to consider. Investment banks are represented on the liaison group. They agree that the SRR should focus on deposit-takers, but there is clearly an issue for the future, which we are considering.
The second point raised by the hon. Member for Fareham concerns our limitations with regard to branches. As I outlined in the earlier debate, we need to be clear that the SRR can apply only to UK-incorporated banks. Under European economic area law, prudential regulation of EEA branches is for the home state regulator who is responsible for taking the lead on resolving difficulties with EEA banks. The powers of the host state regulator are therefore limited. Even if we sought to take powers to apply the SRR to EEA branches, the UK authorities could act on those powers only in highly circumscribed ways. Many of the SRR powersfor example, share-transfer powers, which have been developed for use in relation to shares and securities as defined in UK lawwould have to be completely redesigned to be applicable to EEA branches.
The approach that we have taken is consistent with the principles of home state regulation of EEA branches. However, the Committee should also note that the remit of the Financial Services Compensation Scheme extends to branches of banks from other EEA states, which have joined the top-up arrangements, as per the directive. Of course, the FSA works closely with other regulators within the EEA to resolve difficulties with EEA firms operating in the UK.
Our experience with the Icelandic branches has demonstrated the importance of ensuring that home state regulation is effective. We need to hold further discussions about that in international forums. A college of regulators has also been proposed, but we need to ensure that people putting money into a branch of a foreign bank feel sufficiently assured that their money is safe, and to ensure that it is made clear which authority is regulating a bank or building society when people are investing their money.

Mark Hoban: The Minister has touched upon the distinction between branches regulated through home/host arrangements and UK-incorporated subsidiaries. More than anyone appreciated, the Landsbanki situation revealed the growing gap for consumers between branches and UK-incorporated businesses. Some measures in the Bill would enable a wholesale transfer, for example, of accounts from one bank to another, as happened with Bradford & Bingley. I am not clear from the Bill and from the Ministers explanation whether that type of facility would have been available to the depositors of Landsbanki as a branch. I suspect that it would not have been, so depositors will have to understand that there are two levels of protection and that it will be much easier for them to get continuity of service and to have instant access to their money if a UK bank is in trouble, because the safeguards do not exist with foreign-owned branches. Icesave depositors could be waiting until the end of the month to get their money. How do the Government or the FSA intend to communicate the important differences between a UK-incorporated bank and a branch of a foreign bank?

Ian Pearson: An important issue of investor awareness and information is being raised, which we have all suddenly become far more aware of over the past few months. It has always been the case that a person investing in the Isle of Man is investing in a separate tax jurisdiction with a separate regulatory regime. I do not think that the situation has been made as clear as possible to individual investors, whether they are investing in a branch of an Icelandic bank or in a UK subsidiary of an Icelandic bank. There needs to be greater clarification in the marketplace, which, I am sure, the Financial Services Authority, which regulates those matters, is addressing.

Peter Bone: I am grateful to the Minister for accepting an intervention just before he finishes. From what he is saying, I understand that there will be a compulsion or a health warning on foreign subsidiaries in this countryit is a very good ideawhich says, Certain aspects of your investment are not protected by British regulations. Is that what the Government are proposing?

Ian Pearson: I certainly want to use that sort of language. Investors should be aware of the regulatory regime and the deposit protection measures that apply to any bank in which they consider putting their money. I hope we all accept that general principle. We need to ensure that there is clarity of information in the marketplace, which is perhaps not there to a sufficient extent at the moment.
Several hon. Membersrose

Roger Gale: Order. The Minister has wound up the debate.

Question put and agreed to.

Clause 2, as amended, ordered to stand part of the Bill.

Clause 3

Interpretation: Other expressions

Ian Pearson: I beg to move amendment No. 88, in clause 3, page 3, line 1, leave out from assistance to end of line 2 and insert
has the meaning given by section [Financial assistance]..

Roger Gale: With this it will be convenient to discuss Government new clause 9Financial assistance.

Ian Pearson: The purpose of the amendments is to provide the Government with the power to specify assistance that should or should not be included in the definition of financial assistance for the various purposes for which it is defined in the Bill, particularly as it is used in part 1. The term financial assistance appears throughout part 1. For example, it appears in relation to the trigger conditions for the special resolution regime and in relation to the valuation principles for the calculation of compensation.
Committee members will recall that the term also appears in part 7, as we have already discussed, to provide the necessary parliamentary authority for the Treasury to use public funds to provide financial assistance to financial institutions and
in connection with, the provision of financial assistance to building societies.
In all circumstances, the term includes giving guarantees, indemnities or any other kind of financial assistance, actual or contingent. The reason for moving the amendment is to recognise the fact that the Government can provide financial assistance to failing banks in a number of ways, and they may not wish some form of assistance to be treated as financial assistance for the purposes of all of the Banking Bills provisions.
Financial assistance is mentioned throughout this part of the Bill, but perhaps I might explain the purpose of the amendment by referring to two examples. First, in Clause 9(3), the provision of financial assistance for the purpose of resolving a threat to financial stability is defined as one of the conditions for taking a bank into temporary public sector ownership. However, it is not the Governments intention that all forms of financial assistance to banks should mean that such a condition would be met, as that would provide a serious disincentive for banks to take advantage of other forms of financial assistance. In particular, the Government are thinking of the recent financial assistance that has been offered to the banking market as a whole, including the recapitalisation scheme and the credit guarantee scheme for banks to take up on commercial terms.
Another example can be found in clause 7, which requires the FSA to determine whether a failing bank remains in compliance with its threshold conditions. When assessing whether the threshold conditions continue to be met, it is likely that it will be appropriate for the FSA to consider the position of the firm without taking into account financial assistance provided to that firm on an exceptional basis. However, it may be appropriate for the FSA to take into account any financial assistance provided under a system-wide schemesuch as that provided under the recapitalisation schemewhen considering whether the firm still meets its threshold conditions. It is difficult to say now what forms of assistance will be excluded from the definition. To future-proof the Bill by providing for current and future schemes of financial assistance to be included or excluded as appropriate, the Government believe that it is prudent, therefore, to take a power to specify types of assistance that should and should not be counted as financial assistance. I hope that hon. Members will agree that the amendment is a sensible and prudent measure and I commend it to the Committee.

Mark Hoban: I am grateful to the Minister for clarifying the purpose of the amendment and new clause 9. Nevertheless, I want to question him further. I think that he was trying to draw a distinction between specific assistance to an institution and system-wide support. He cited the recapitalisation package, but that has been accepted by only a handful of banks, so the credit guarantee scheme is available only to those banks that signed up for it.
I shall broaden the matter out a little. Last week, the Bank of England published a consultation document on the types of financial assistance that it might provide to banks. On the whole, they are system-wide schemes. They include the operational facilities that it proposes using to replace the standing facilities; the statutory discount window facility that will enable banks to borrow, given security against a wide range of collateral at any time, the type of collateral reflecting the size of the drawing; and the possibility of permanent long-term repos against high-quality private sector securities. As far as I am aware, they are system-wide schemes. Do the Government believe that they would fall outside the definition of financial assistance and that they have no mind to accept new clause 9?

Ian Pearson: On the recapitalisation scheme, the Government believe that assistance under it should not be of a type that would trigger certain provisions of the Billfor instance, the provision for taking a bank into temporary public sector ownership. Nor should system-wide financial assistance, including the recapitalisation scheme, be treated as financial assistance for the purposes of the FSAs assessment of whether the threshold conditions have been met.
The purpose of the recapitalisation scheme is to recapitalise banks and place them on a more secure financial footing. It would therefore be inappropriate if access to the scheme impacted on triggers for the use of the SRR powers. However, that does not mean that it will be excluded from the definition of financial assistance for all the purposes of the Bill. For instance, in some cases, access to the recapitalisation scheme may be relevant in determining compensation.
The special liquidity scheme has been mentioned. It does not fall within the definition of financial assistance, but it is not clear whether such system-wide assistance should be treated as financial assistance for the purposes of the trigger mechanisms in the Bill, including the determination by the FSA of whether a bank meets its threshold conditions.

Mark Hoban: The Minister said that it is not at all clear whether things such as the special liquidity scheme should be treated as financial assistance. He will understand that those who are using a special liquidity scheme would like some clarity on whether it is classified as financial assistance under the Bill.

Ian Pearson: Let me try to clarify the matter. The special liquidity scheme falls within the definition of financial assistance, but I said that it is not clear that such system-wide assistance should be treated as financial assistance for the purposes of the trigger mechanisms in the Bill, including the determination by the FSA of whether a bank meets its threshold conditions. We therefore need to exclude such assistance from certain provisions of the Bill. I hope that I have made matters clear.

Mark Hoban: I am not entirely sure that the Minister has done so. It would be useful for the Committee to know in which sections it might be deemed to be financial assistance and in which it will not. My understanding is that the special liquidity scheme was designed to help banks through the current liquidity crisis. The Bank of England has made some proposals, but it would be helpful to know how it might develop its money market operations to improve liquidity in the market. What will be the precise interaction between those schemes and the Bill? That might well affect the extent to which banks take up the schemes. It also suggests that a bank that takes up a special liquidity scheme might find itself at risk under the Bill if the scheme is not excluded from the definition of financial assistance throughout.

Ian Pearson: I hope not to create confusion on that point. I hope that I was clear in saying that the SLS does fall within the definition of financial assistance, but that its operation would clearly not be something that one would want to take account of when the FSA was determining the threshold conditions. We will need to exclude that from certain provisions of the Bill, but not all of them. It might help members of the Committee if I wrote to them to explain in more detail how we see amendment No.88 and new clause 9 operating in practice.

Mark Hoban: I am grateful for the Ministers proposal to write to us, and it would be helpful if he indicated in that letter the sections in which the SLS would and would not be treated as financial assistance.

Ian Pearson: I will of course try to bring as much clarity as I can in that area, and I accept the point that some people will need to understand exactly how the regime will work.

Amendment agreed to.

Clause 3, as amended, ordered to stand part of the Bill.

Clause 4

Special resolution objectives

Mark Hoban: I beg to move amendment No. 77, in clause 4, page 3, line 19, at end insert
; and for the avoidance of doubt, this includes ensuring
(i) continuity of service; and
(ii) unrestricted access to deposits..

Roger Gale: With this it will be convenient to discuss the following: Amendment No. 74, in clause 4, page 3, line 19, at end insert
(6A) Objective 3A is to protect and safeguard the value of the enterprise..
Amendment No. 78, in clause 4, page 3, line 20, at end insert
and to ensure that the expenditure of any public or private funds is done in an economically efficient manner..
Amendment No. 76, in clause 4, page 3, line 22, at end insert
(8A) Objective 6 is to protect the interest of creditors.
(8B) Objective 7 is to avoid distorting competition amongst banks..
Amendment No. 79, in clause 4, page 3, line 24, at end add
(10) In respect of Objective 7, competition law shall apply to a bank, whether it is wholly or partly owned or controlled by the Government, including a bank to which sections 9 and 12 apply.
(11) Where a bank is wholly or partly owned or controlled by the Government and where section 214 applies, the bank is prohibited from using its favourable position or Government support to its commercial advantage and thereby to prevent, restrict or distort competition in the market for financial services as a whole, or on a product by product basis.
(12) For the purposes of subsection (10) competition law includes the provisions of the Competition Act 1998 and the Enterprise Act 2002, and European Community law competition provisions.
(13) For the purposes of subsections (10) and (11) ownership or control shall be determined by reference to sections 26 and 29 of the Enterprise Act 2002 and by reference, where Community law applies, to the Council Regulation 130/2004 (the European Merger Regulations)..
Clause stand part.

Mark Hoban: The clause is an important element of the Bill because it sets out the objectives that will determine how the various stabilisation powers will be exercised. I thought that I would perhaps start with the clause stand part section of the debate and then move on to the various amendments, because that is probably the most helpful way of putting the amendments in context.
The clause lists the five objectives to be met through the special resolution regime. Subsection (9) makes it clear that those are set out in no particular order, but I think that since our debate about the types of institution to be covered by part 1, we have all had a feeling that one of the main thrusts is the protection of depositors, and in a moment I will deal with how I see that playing out. I will just comment on the objectives.
We considered the first objective, financial stability, at some length last Thursday, so I do not want to run through that debate again, and I suspect that you would not allow me to do so, Mr. Gale. I was taken by the definition given in the draft code of practice, because it gives an indication of the direction in which the Government are travelling. It is rather a pity that the Committee was not able to see the code of practice before our debate on Thursday, because I thought that one point in the definition went rather wider than that given by the Governor of the Bank of England and by Nigel Jenkinson, the executive director of financial stability at the Bank, in oral evidence.
In the code of practice, it is suggested that financial stability includes
the efficient operation of financial services and markets for...capital-raising, risk transfer, and the facilitation of domestic and international commerce.
That is quite a broad and helpful definition and I think that it is actually broader than the definition that was given when we discussed it last Thursday. However, I am not clearthis is one of the recurrent themes that has emerged throughout the debate about the objectiveswhat weight will be given to the individual objectives when looking at the operation of the special resolution regime.
One of the consequences of the way in which the Government used powers to freeze Landsbankis assets was that it affected the efficient operation of wholesale markets. It created uncertainty about how transactions would be closed out, and the Government responded to that uncertainty through their use of clarifications to licences under a separate clarificatory document. But the action created uncertainty in the market, prevented the efficient operation of the wholesale market, and acted as a barrier to international commerce. In seeking to protect depositors and, potentially, safeguard taxpayers interests, the Government undermined the efficient working of capital markets. Therefore, it would appear that in the context of the Governments approach to Landsbankigiven the Ministers remarks on clause 2, I appreciate that branches are excluded from the powers in this Bill; I am just using this as an exampleobjective 3, to protect depositors, and objective 4, to protect public funds, had higher priority than financial stability, or certainly that bit of the financial stability objective that relates to the efficient functioning of capital markets.
Although the clause states in subsection (9) that there is no priority, it would be helpful if the Minister could give us some feeling of the kind of circumstances that might arise and how the objectives fit into them. We do not know that at the moment.
The clause states that objective 2 is
to protect and enhance public confidence in the stability of the banking systems of the United Kingdom.
Public confidence has several dimensions, according to the code. It refers to the expectation that deposits will be repaid in accordance with the terms, that normal banking services will be continuously available, that perceived problems in one bank or building society will not extend to other banks, and that systems exist to protect the interests of depositors if a bank does suddenly fail.
The intention of the objective is to drive us towards the view that authorities will have regard for the need to act in a way that enhances rather than detracts from peoples confidence in the banking system, but I wonder to what extent the objective will be looked at in the context of the crisis. We have had a sustained period of financial instability, and there is a perceived systemic risk to the banking system. As a consequence, to use the Ministers phrase in giving evidence to the Committee a fortnight ago, the Government will do what it takes to fix it. Clearly, what it takes in the context of a systemic crisis may well be very different from what it takes to fix the problems of a single bank that faces problems in isolation from the others.
For example, in the context of this crisis, we have a de facto 100 per cent. guarantee for retail deposits, as evidenced initially in respect of Northern Rock but now in connection with deposits with Icelandic banks that have not been transferred to ING Direct, but we know from our debate on the Financial Services Compensation Scheme and the amendments to the FSAs rules that the deposit limit is £50,000.
My understanding is that if we were to look at the various powers that are available to the Government, in normal circumstances, less weight may be given to objective 2 than in the current circumstances, and in normal circumstances we would go back to a £50,000 limit rather than a 100 per cent. limit. It would be helpful if the Minister could explain how objective 2 would work in periods of financial instability such as we have now, and how important it would be if we were in more stable times.
Objective 3, which is intended to protect depositors, was largely covered in our debate on the Financial Services Compensation Scheme at the start of Committee about what role the FSCS can play in ensuring that there is a speedy pay-out to depositors. If consumers can access their funds quickly and speedily, that will give them confidence in the strength of the banking system.
Another way of protecting depositors is to transfer accounts to another bank. That could take place under the stabilisation options as part of the powers that are available. That is what happened with Bradford & Bingley. Over the weekend, the accounts were transferred from Bradford & Bingley to Abbey Santander and, as a consequence, the depositors at Bradford & Bingley had access to their money from Monday morning. They would not have noticed a difference in the system, because it was a seamless transfer, their accounts were not frozen and there were no problems about paying their bills, whereas those accounts that were not covered by that type of processthose of Kaupthing Singer & Friedlander that were not part of the Edge brandare being guaranteed by the Government and will be subject to a pay-out through the Financial Services Compensation Scheme. People with such accounts will not have that same easy access to their money. From the debate last week about Landsbanki, we have seen that people with deposits in Icesave will not get access to their money probably until the end of this month. There is an issue about ensuring that the tools that we have facilitate easy access to depositors accounts. That is an important objective.
The Minister may want to correct this impression if he thinks it is erroneous, but it is clear from the debate so far that, if we were to consider ordering the objectives, objective 3, on the protection of depositors, would top the list. I would be interested to find out whether the Minister disagrees with that interpretation and under which circumstances it would not be the most important objective.

Ian Pearson: The hon. Gentleman clearly understands the clause, including subsection (9), which states:
The order in which the objectives are listed in this section is not significant; they are to be balanced as appropriate in each case.
Yet he is trying to get the Government to indicate that certain areas are priorities; they are all priorities for us. We will want to make decisions depending on the circumstances of particular cases. We believe that we are discussing the right sorts of areas. I resist his view that one objective is more important than another; they need to be balanced.

Mark Hoban: I accept that up to a point. However, this part of the Bill is limited to institutions that accept deposits, as we established clearly when we discussed clause 2. I have to say that the Bill points in a particular direction.
The Governments priorities in dealing with the current financial crisis and with where particular institutions have been under threat have pushed towards objective 3 taking the lead in respect of how the crisis is to be resolved. Perhaps that is a presentational issue and if that is so I would accept that. However, there is a tension between the objectives and we need to understand how that tension would work out in practice. If the objectives rank equally, it would be helpful to understand where the trade-offs between them are, because at the moment I am not clear that there is necessarily a trade-off between objective 3 and the other objectives.

Peter Bone: My hon. Friend is making an important point. Clearly, some of the objectives cannot be met at the same time. Is not the reality of the matter that when panic set in at No. 11 Downing street, when the crisis was in full flow, the Governments objective was presentation? Whatever made the Government look best was the objective. That is not really the basis for good government. We need to know the different weighting of the objectives.

Mark Hoban: My hon. Friend takes an uncharacteristically uncharitable view of the Governments objectives on the matter. However, he makes a point. The thrust of the debate has been protecting depositors, and there are going to be tensions between the objectives. Notwithstanding subsection (9), I tempt the Minister to outline a scenario in which objective 3 would be subordinated to another objective, and to say where the trade-off is between it and other objectives. There could be a trade-off between objectives 3 and 4, because the Government could issue a 100 per cent. guarantee of deposits. That would protect depositors, but at a cost to the taxpayer. As we discussed in earlier debates, the taxpayer is likely to pick up the cost of guarantees on amounts of more than £50,000 in connection with some of the Icelandic banks. There is a tension between protecting taxpayers interests and protecting depositors. I am not being critical of the Government, but in those sorts of cases objective 3 comes before objective 4, not only in the sequence in the Bill but in producing an outcome.
It might be that that trade-off is not quite as clear in more stable times. The Government may decide that there is not a systemic risk to the financial system and therefore, for example, that they can give a lower priority to the protection of depositors through the Financial Services Compensation Scheme than they give at the moment. However, given the debate on this clause, a degree of transparency regarding the importance of the various objectives and how they will work in practice needs to emerge. This is one of the key clauses in the Bill, and such transparency will help people to understand how the special resolution regime will work in practice.
While we are on objective 3, I should like to speak to amendment No. 77, which would add, at the end of line 19, the words
and for the avoidance of doubt, this includes ensuring...continuity of service; and...unrestricted access to deposits.
As my remarks have indicated, depositors preference would be the ability to be transferred seamlessly from bank A to bank B when there is a financial crisis, rather than having to make a claim through the FSCS. The amendment would emphasise that that is the best way to achieve the right outcome for depositors. It is not the only way, because we have the FSCS, but for the protection of depositors, it is important to be clear about our expectations when the tripartite authorities look at the various instruments to be exercised.
The great example of when such an approach worked was Bradford & Bingley. The approach was facilitated in a way that kept the payment system open so that people could process their transactions, ordinarily. There is a concern about the way in which one of the Icelandic banks was dealt with. The payment system in respect of that bank and its customers was frozen, thereby preventing people from making payments from their accounts. For a number of reasons, that is not a good position to be inneither for the customers nor the bank. If customers cannot make a mortgage payment to a lender because their account is frozen, they will be in arrears. That is not good for the customer and creates a problem for them with their bank. If a bank suffering from that payment freeze is a mortgage bank, it will not be able to receive payments from its borrowers, which will create uncertainty about the value of the book of business. If there is a problem with consumers, the transfer and the way in which they access their bank accounts, the best thing to do is to ensure that there is a transfer from one bank to another, rather than face the consequences of their account being frozen and then be locked out of that account until the FSCS has managed to work its way through. That is why, through amendment No.77, we are trying to be more precise about what we would like to see: an optimal solution for how to protect depositors.
In the context of objective 4, which is to protect public funds, there is little explanation in either the code or the explanatory notes of how that objective will work in practice and in conjunction with the other objectives. We know, for example, that taxpayer funds are at risk at Northern Rock, but they are also potentially at risk at Bradford & Bingley. In addition, there is exposure on Landsbanki and the non-edge accounts of Kaupthing, where there is a taxpayer guarantee. We know that taxpayer funds have been used as part of a recapitalisation package for the banking sector, and last Thursday, in the context of clauses 214 and 215, we discussed how we can broaden the categories of the financial institutions that could receive financial support through the consolidated loans fund. Today, we have talked about broadening the definition of financial assistance.
In the context of objective 4, we need to understand from the Minister what value is attached to the use of taxpayers funds, and whether the Government will instinctively back a solution that has more limited recourse to public funds than one that would require greater recourse to public funds. Are there options under the various tools available under part 4 that require a small amount of the taxpayers fund to work, and which would therefore be the Governments preference, even if they might compromise the stability of the financial systems objective in objective 1? Again, we want to be able to understand the interplay between the two.
We will come back to objective 5 when we talk about later clauses. One of the key words in the code that we ought to dwell on for a moment is proportionately. The code says that
the bank or building society itself, its shareholders or creditors or other third parties...have a right of control over
their property.
One of the Bills features is that in certain circumstances, it gives the tripartite authorities the right to interfere with control over that property. The argument in the code is that
The inclusion of this objective acknowledges the importance of acting proportionately in exercising these powers.
I am not clear from the code what proportionately means and under what circumstances the Government think it appropriate to break those rights of control. The partial transfer mechanism does break that right of control, and some safeguards will be put in place over the exercise of that right. It would be helpful if the Minister threw some light on paragraph 13 of the code. As drafted, it does not go far enough in setting out the way in which this objective could be satisfied.
I want to move to amendments Nos. 74, 76 and 78. We now have an opportunity to discuss whether the list of objectives in clause 4 is complete and whether there are other objectives that we should bear in mind when exercising these powers where there are the stabilisation tools, and what sort of framework should be used to govern the choice of tools by the tripartite authorities. I do not want to steal the thunder of the hon. Member for South-East Cornwall by picking up on amendment No. 74, but, as he said from a sedentary position, it complements amendment No. 76, which inserts a new objective 6 to protect the interests of creditors.
This brings a different dimension to the debate about the objectives. We talked about them in the context of protecting depositors and the taxpayer. We touched a little on the context of objective 5, but other people have an interest in how the stabilisation tools are going to be used. There are creditors who will have an interest, not just trade creditors, but non-retail depositors. These are people who have money on deposit with a particular bank who are not covered by the FSCS and whose accounts will not be transferred across automatically in the way that we had envisaged in the context of objective 3.
It is worth just mentioning that objective 3 just talks about depositors. It is no more specific than that. It does not say retail. The Minister might argue that objective 3 covers wholesale as well as retail depositors. This is where some tension arises in the clause. One can envisage a situation where it is possible to achieve objectives 3 and 4 in the context of a particular crisis by transferring depositors across to a third party and then setting off a mortgage book to a separate third party through a fire sale. That fire sale may raise enough to cover the taxpayers exposure, and obviously the transfer deposits would meet the interests of the depositors, but would it be sufficient to cover the interests of other creditors? There is insufficient recognition in the clause of the interests of other creditors. Inserting objective 6 or objective 3A into the Bill would provide a dimension that is currently lacking.
The objective of the hon. Member for South-East Cornwall goes rather wider than mine in terms of the enterprise value. It will take into account the interests of shareholders. One of the things that we recognised in the debate is that shareholders should bear some of the costs of the failure of an institution. The question is whether having the more precise definition that we should aim to protect the interests of the creditors is a good way to ensure that the range of creditors in the institutions are protected.
One area that we need to think about is bondholders. There is some concern that when we look at the people who provide capital, we often do so in the context of shareholders and the equity element of the capital in a business. Clearly, many institutions do raise money through bond issues. That is where part of the concern comes regarding the adequacy of the safeguards under the Bill as to whether bondholders interests are adequately protected. Explicit reference through either proposed objective 3(a) or objective 6 would help ensure there is some recognition of the role that bondholders play in financing businesses and that their interests are not being disregarded in the pursuit of any of the other objectives.
Amendment No. 78 will, at the end of line 20, insert the words:
and to ensure that the expenditure of any public or private funds is done in an economically efficient manner.
That is to make sure that we look very carefully at the way taxpayers funds are being used to resolve financial problems at a particular institution. In examining the various tools that the Government are looking at, are we making sure that the best way to get value for our money is considered? If they are looking at financial support, perhaps through a guarantee of deposits, is that the most effective way of meeting the objectives of the Bill? Are there better, more effective ways they could achieve that?
Amendment No. 76 has two more objects. It protects the interests of creditors and inserts a new objective 7, which is to avoid distorting competition among banks. Amendment No. 79 amplifies the meaning of objective 7.

Peter Bone: This is a very important issue. When the Government first suggested that Lloyds and HBOS could join together and tear up competition law, it was because no public money would be involvedit was going to be a private sector settlement. We have subsequently seen huge amounts of public money being put into this mega-bank. If the proposed objectivea very important onewere included, it would not allow that sort of thing to happen. It seems a very important addition to the objectives.

Mark Hoban: Competition is important. It has cropped up twice in the current financial crisis, initially in the context of Northern Rock and also in the context of the merger of Lloyds and HBOS. Banks and building societies expressed concern at the time of the acquisition into public ownership of Northern Rockwhich now feels more like nationalisationthat Northern Rock would be able to use its position of effectively having a sovereign guarantee, by virtue of being owned by the Government, to operate in a way which would undermine the competitive position of other institutions. Having the guarantee, it could market itself as being as safe as housesperhaps not the best analogy, given the state of the house market. It was seen as a safe bet because the Government were standing behind it. Arrangements were put in place to ensure that Northern Rock did not exploit its competitive position vis-Ã -vis other lenders.

Colin Breed: Obviously, that is exactly what happened. At some stage Northern Rock had to cease taking certain moneys and products and also had to ensure it was complying with state aid rules which could be invoked. So, it is a real situation, which could easily arise again. It is almost axiomatic that an institution is placed at a competitive advantage if the Government become involves in that institution and stand behind it.

Mark Hoban: Indeed. My recollection is that the start of the Northern Rock debate was about yield and return, rather than stability. When we had the second wave of financial instability in the aftermath of Lehmans and people were moving their deposits around, Northern Rock became particularly attractive, as did certain Irish banks because the Irish Government gave a 100 per cent. guarantee. There was a flight to safety rather than to yielda change in approach. My hon. Friend the Member for Wellingborough was about to interveneperhaps that covered his point. As I said, we will come on to HBOS in a second.

Peter Bone: That was the gist of the argument that the hon. Member for South-East Cornwall made. If we have a series of objectives that have to be balanced in making a decision, is it not important that this objective is one of them? At the moment it would be excluded from consideration.

Mark Hoban: That is why we were trying to tease out from the Minister why the Government have not included the objective of competition and distorting competition between banks. My hon. Friend raised the issue of Lloyds TSB and HBOS. When the deal was announcedprior to the Governments recapitalisation packageboth Houses agreed that the competition rules should be waived to facilitate the merger. Referral of the bid would have slowed the process, added to the uncertainty in the financial markets and created more instability.

Sally Keeble: Does the hon. Gentleman accept that funds flowing to a certain organisation or people behaving in a certain way do not mean that the bank or institution concerned is taking advantage of its position? The Governor of the Bank of England made that point yesterday in the Treasury Committee. It is about public perception. The hon. Gentleman would have to frame an objective that dealt with the intent of the organisation in trying to exploit its position.

Mark Hoban: The hon. Lady makes a good point, which goes back to the example of Northern Rock. Potential depositors saw Northern Rock as a safe place to put their money because it was under public control, not because of any deliberate action on behalf of its management. That is why proposed new subsection (11) in amendment No. 79 says that a
bank is prohibited from using its favourable position or Government support to its commercial advantage and thereby to prevent, restrict or distort competition in the market for financial services as a whole, or on a product by product basis.
That tries to limit the opportunities for a bank to use the fact that it is backed by the Government to engage in distorting competition. That issue was dealt with in Northern Rock by saying that there was a limit to how many of its products would appear in a best-buy table. In that respect, Northern Rocks management were exploiting the banks position by using the Government guarantee. A more organic process would have been for consumers to decide that they wanted their money to go to a lower risk destination despite the yield offered.

Colin Breed: That just exposes yet another tension between the objectives, because if the bank could use its position in that way it might well minimise the impact on the taxpayer at a future stage, and significantly enhance the depositors situation. If we want to promote those objectives, the use of the banks positionthe Government standing behind themcould be extremely advantageous in promoting other objectives.

It being One oclock,The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four oclock.